THE INDIAN HOTELS CO. LTD.,MUMBAI vs. PR. CIT-1, MUMBAI

IN THE INCOME TAX APPELLATE TRIBUNAL “C” BENCH, MUMBAI BEFORE SHRI AMARJIT SINGH, JM AND SHRI S. RIFAUR RAHMAN, AM आयकर अपील सं/ I.T.A. No.950/Mum/2021 (ननधधारण वर्ा / Assessment Years: 2014-15) बनधम/ The Indian Hotels Company PCIT-1 Room No.330, 3rd Floor, Ltd. Vs. 9th Floor, Express Towers, Aayakar Bhavan, Barrister Rajini Patel Marg, Maharishi Karve Road, Nariman Point, Mumbai- Mumbai-400020. 400021. स्थधयी लेखध सं./जीआइआर सं./PAN/GIR No. : AAACT3957G (अपीलाथी /Appellant) (प्रत्यथी / Respondent) .. Assessee by: Shri K. K. Ved Revenue by: Shri Surendra Kumar (DR) सुनवाई की तारीख / Date of Hearing: 17/03/2022 घोषणा की तारीख /Date of Pronouncement: 12/04/2022 आदेश / O R D E R PER AMARJIT SINGH, JM: The assessee has filed the present appeal against the order dated 31.03.2021 passed by the Principal Commissioner of Income Tax-01, Mumbai [hereinafter referred to as the “PCIT”] relevant to the A.Y.2014-15 in which the Principal Commissioner of Income Tax-01 has invoked the revisional power u/s 263 of the I.T. Act, 1961. 2. The assessee has raised the following grounds of appeal: - “Re.: Validity of Order u/s, 263; On the facts and in the circumstances of the case and in law, the impugned Order dated 31 March 2021 passed under section 263 of the Act is without jurisdiction and bad in law. Without prejudice to the above, On the facts and circumstances of the case and in law, the Principal Commissioner of Income Tax (“PCIT”) has erred in passing the Order dated 31 March 2021 u/s. 263 of the Act.

ITA No.950/Mum/2021 A.Y. 2014-15 1.2.1. On the facts and circumstances of the case and in law, the PCIT has erred in holding that the Order dated 30 October 2018 passed by the Assistant Commissioner of Income-tax, Circle 2(3X2) (““ACIT”) u/s. 143(3) r.w.s 144C(13) of the Act was erroneous and prejudicial to the interests of revenue and therefore the revision of the same by the PCIT u/s. 263 of the Act is bad in law. 1.2.2 On the facts and circumstances of the case and in law, the Appellant submits that, ACIT had not only made adequate inquires, but had also undertaken necessary verification basis the details/ documents sought from the Appellant during the course of assessment proceedings, and hence, the assessment order passed by ACIT is neither „erroneous‟ nor „prejudicial‟ to the interest of the revenue. 1.2.3 On the facts and circumstances of the case and in law, the Appellant submits that the order passed by the Id. ACIT do not fall within the requirements of Explanation 2 to Section 263 and hence said order cannot be deemed to be erroneous or prejudicial to the interest of the revenue. 1.2.4 On the facts and circumstances of the case and in law, the Appellant submits that, the order passed under section 263 amounts to change of view by PCIT and hence the revision u/s. 263 of the Act is bad in law. 1.2.5 The learned PCIT passed the revisionary order on the issues disregarding binding judicial precedents (also submitted during the revisionary proceedings) leading to unwarranted litigation. 1.3 On the facts and circumstances of the case and in law, the learned PCIT failed to appreciate that revisionary power u/s 263 of the Act does not cover orders passed by the Assessing Officer in conformity with the directions of the DRP under Section 144C of the Act.

ITA No.950/Mum/2021 A.Y. 2014-15 1.4 On the facts and circumstances of the case and in law, the learned PCIT failed to appreciate that the exercise of revisionary powers under section 263 of the Act to the extent of proposed increase in the interest disallowance u/s 36(1 iii) is not tenable as per clause (c) of Explanation | to section 263 of the Act, as the said issue is already considered and decided by Hon‟ble DRP. 1.5 On the facts and circumstances of the case and in law, the Appellant prays that the impugned Order passed u/s. 263 of the Act by the PCIT is to be struck down. Without prejudice to the aforesaid grounds: Re: Disallowance of deduction in respect of premium on redemption of debentures under section 36(1 (iii) of the Act 2.1 On the facts and in circumstance of the case and in law, the learned PCIT has erred in disallowing deduction claimed by the Appellant in respect of premium on redemption of debentures under section 36(1 iii) of the Act. 2.2 On the facts and in circumstance of the case and in law, the learned PCIT erred in not appreciating the fact that the premium paid on redemption of debentures was claimed by the Appellant as deductible expenses over the debenture tenure and the same has been consistently accepted by the tax department after making due inquiries at the time of regular assessments. 2.3 On the facts and in circumstance of the case and in law, the learned PCIT erred in not following the decision of the Supreme Court in case of Madras Industrial Investment Corporation Ltd v. CIT (225 ITR 802), relied on by the Appellant and erred in passing the revisionary order on the issues disregarding binding judicial precedents (also submitted during the revisionary proceedings) leading to unwarranted litigation.

ITA No.950/Mum/2021 A.Y. 2014-15 2.4 On the facts and in circumstance of the case and in law, the Order of the PCIT directing the AO to re-examine the issue needs to be struck down. Without prejudice to the above, 2.5 On the facts and in circumstance of the case and in law, the learned PCIT has ignored the fact that the similar issue pertaining to disallowance under section 36(1\iii) of the Act has already been decided in favor of the Appellant in its own case in various earlier assessment years by the orders of Hon‟ble ITAT, DRP and CIT(A). 2.6 On the facts and in circumstance of the case and in law, no disallowance of premium expense under section 36(I\iii) since the proceeds realized from debenture issue was utilized for the purpose of business of the Appellant. 2.7 On the facts and in circumstance of the case and in law, no disallowance of premium expense under section 36(1 iii) since the proceeds realized from debenture issue formed part of mixed pool of funds of the Appellant and hence a presumption would arise that the said investments would have been made first out of own funds. 3. Disallowance of expenses incurred in relation to discontinued project 3.1 On the facts and in circumstance of the case and in law, the learned PCIT has erred in disallowing expenses incurred by the Appellant in relation to discontinued project amounting to Rs. 8.90 crores under section 37(1) alleging that the same is a capital expense. 3.2 On the facts and in circumstance of the case and in law, the learned PCIT failed to appreciate the fact that the Appellant had incurred expenditure of Rs.8.90 crores in relation to prospective hotel project which was aborted and written off during the year. 3.3 On the facts and in circumstance of the case and in law, the learned PCIT failed to appreciate that expenses in relation to

ITA No.950/Mum/2021 A.Y. 2014-15 discontinued/ abandoned hotel project is allowable as deduction under section 37(1) of the Act as the said project is directly in connection with the regular business (i.e. Hotel business) of the Appellant. 3.4 On the facts and in circumstance of the case and in law, the Order of the PCIT directing the AO to re-examine the issue needs to be struck down. The Appellant craves to add, alter, amend, substitute and/or modify in any manner whatsoever modify all or any of the foregoing grounds of appeal at or before the hearing of the appeal.” 3. The brief facts of the case are that the assesse filed its return of income on 30.11.2014 declaring total income to the tune of Rs.105,09,25,133/- for the A.Y.2014-15 under the normal provision of the Act. After passing the DRP order, the assessment was completed determining the total income to the tune of Rs.420,50,94,506/- under the normal provision of the Act and an amount of Rs.174,56,97,810/- u/s 115JB of the Act u/s 143(3) r.w.s. 144C(13) of the Act on 30.10.2018. On verification, the Ld. PCIT has invoked the revisional power u/s 263 of the Act on following grounds: - “(i) On examination of records it is seen that disallowance of interest on account of diversion of funds for non-business purpose is in the ratio of 3113.08 cr./6766.37 cr. Assessee claimed premium on redemption of debentures, which is in the nature of interest/cost of borrowings only. The claim of the assessee in the computation of income should have been disallowed in the same ratio on which nterest was disallowed. In its reply dated 28.11.2017, assessee admitted that it is also a form of interest that is return on investment of debenture holder. Failure of the assessing officer to consider the above for disallowance has rendered the order dated 30.10.2018 as erroneous in so far as it is prejudicial to the interest of the revenue.

ITA No.950/Mum/2021 A.Y. 2014-15 (ii) The assessee has claimed an amount of Rs.8.90 crs as exceptional item on expenses on discontinued project at Lake End Udaipur. The expenses was not related to existing business and capital, hence should have been disallowed. The expenses claimed under the head was related to lease rent, registration fees, design fees etc. These expenses are not related to its existing business. Failure of the assessing officer to disallow the same has rendered the order erroneous in so far as it is prejudicial to the interest of the revenue.” 4. Thereafter, the notice was given and after the reply of the assessee, the PCIT invoked the revisional power u/s 263 of the Act. The PCIT was of the view that the order passed by AO was erroneous and prejudicial to the interest of the revenue and accordingly invoked the revisional power u/s 263 of the Act to pass the re-assessment order on the above mentioned points by set aside order dated 30.10.2018. The assessee was not satisfied, therefore, filed the present appeal before us. ISSUE Nos. 1.1 to 1.3 4. In brief, the contention of the Ld. Representative of the assessee is that the issues have already been examined by AO, therefore, invoking the power u/s 263 of the Act is wrong against law and facts. The PCIT has invoked the power u/s 263 of the Act on the two issues mentioned above. So far as the issue no. 1 is concerned, the Ld. Representative of the assessee has argued that the issue in connection with the disallowance of interest on account of diversion of funds for non-business purpose in the ratio of 3113.08 cr/6766.37 cr had already examined by DRP, therefore, the same is not liable to be considered again through revisional power of the PCIT being the same rank officer had already examined the issue, therefore, the order u/s 263 of the Act is not liable to be sustainable in the eyes of law. It is also argued that the issue has already been examined by the AO, therefore, the said issue is also not required to be considered again by invoking the power

ITA No.950/Mum/2021 A.Y. 2014-15 u/s 263 of the Act. In this regard, the Ld. Representative of the assessee has placed reliance upon the decision of the Hon’ble ITAT Mumbai Bench in the case of Barclays Bank PLC vs. CIT(IT) in ITA. No.827/Mum/2021 for the A.Y. 2013-14 dated 03.01.2022. However, on the other hand, the Ld. Representative of the Department has refuted the said contention. The copy of assessment order passed by AO in view of the provision u/s 143(3) r.w.s. 144C(13) of the Act dated 30.10.2018 is on the file in which the said issue has already been considered by DRP and accordingly followed by AO. The relevant finding is hereby reproduced as under: - “4 Disallowance u/s 36(1)(iii) for investment is overseas entities: 4.1 During the course of assessment proceedings it was observed that the assessee has made investment in overseas entities of Rs. 3,113.08 Crores, the details of which are as under: Sr. No Particulars Amount in Crores 1 International Hotels 2002.03 Management Services Inc. 2 Taj International Hotels HK 1111.05 Ltd. Total 3113.08 4.2 The assessee was asked why proportionate interest in respect of above - investments should not be disallowed u/s 36(1)(iii) of the I.T. Act, 1961 4.3 In response to the above, the assessee submitted its reply dated 28% November 2017, as under: “The learned AO has disallowed interest amounting to Rs.44,53,94,138 in AY 2012-13 and Rs.42,63,65,851 in AY 2013-14, u/s 36(1)(iii) of the Act in respect of investments in overseas subsidiaries. We submit that no disallowance u/s 36(1)(iii) is called for in the year under consideration due to following reasons: The assessee is engaged in the business of hotelering including operating hotels in India as well as internationally. It is recognized as India‟s premiere hospitality provider, owning/operating hotels under

ITA No.950/Mum/2021 A.Y. 2014-15 the brand name „Taj‟ „Vivanta by Taj‟ and „Gateway‟. To create a strong image of is brand in international markets, it had made investment in its overseas subsidiaries / Joint Venture („JVs‟) to the tune of Rs. 3,113.08 crores as of 31 March 2014 as under: Particulars Rs./Crores Investment in TIHK 1111.05 Investment in IHMS Inc. 2002.03 Total 3113.08

These investments have strategic significance for the assessee, which is explained as under: These investments were made in connection with acquisition of hotel properties in UK, USA, Australia and Sri Lanka which resulted into a strategic presence and also furtherance of business in hospitality market across the world. The Company has acquired following hotels, through overseas investments viz. The Pierre, New York, USA, The Campton Palace, San Francisco, USA, Taj Boston, Boston, USA etc. - The presence in such developed countries, which are amongst the most dominating countries in the world, both economically as well as politically, improves our global visibility and creates awareness in the international market. A global presence has become a necessity to respond to the challenges faced by the arrival of global brands in the country. It gives competitive advantage and sustain competition as because of our presence in such countries, we have far greater visibility to foreign customers who travel to India and opt to stay at our hotels thereby benefiting India and IHCL. This obviously results in larger customer base. - These investments are made keeping in mind the international presence and the flow of benefits to Indian company ie. IHCL. Considering the. commercial and economic rationale, this gives a company an advantage of international presence and the flow of benefits in form of operating fees.

ITA No.950/Mum/2021 A.Y. 2014-15 The other strategic benefits derived by the assessee from such acquisition includes; - Visibility in the international market which acts as a key feeder to Taj group's Indian operations - To obtain new management contracts in the international markets (details of „management fees received during AY 2013-14 including from domestic companies and foreign JVs is enclosed. The assessee would like to bring to your notice that it has entered into management contracts for several properties in Marrakech, Qatar, Dubai, Saraya Islands, UAE, China which are expected to fructify in next few years. The assessee became the first Indian hospitality group to receive permission to operate hotels in China. It is due to the presence in various countries that the assessee is able to achieve increase in management contracts, - Enhanced networking, market reach in countries where [HCL does not have formidable presence Recognition on an international level, which in turn enables to gain business experience from the acquired property for positioning its brand at a global level using its image abroad and capitalize on associated brand value at a domestic level Acquainted with use of high end and quality techniques in India thereby attracting foreign tourists - Assistance from companies operating as sale offices (eg IHMS, AHMS) to promote IHCL‟s business worldwide which would promote flow of foreign tourists in India - Getting occasion to touch base the overseas customers with Indian Company brand experience. This would result in higher revenue for assessee which would be offered Co tax. - Showcasing the salient features of the select properties of India by overseas properties attracts the foreign tourist to assessee‟s hotel and

ITA No.950/Mum/2021 A.Y. 2014-15 in turn augments the business of the assessee. The Information about Taj properties is generally provided through in room television set and the advertisement / article in the Taj magazine / Coffee Table magazine kept in the rooms of overseas hotel units. - It is further submitted that in competitive industry like hospitality, apart from retaining existing customers, it is must to reach out the customers to widen its customer base in best possible manner and thereby expand the horizons of its revenue. This is achieved by assessee by using touch base the overseas customers associated with foreign hotels, by virtue of making overseas investments. Further, the object clause of Memorandum of Association specifically empowers Company to acquire and invest in business which the company is authorised to carry on, or which are altogether or part similar to those that the company carries on (extract of Memorandum of Association („MoA‟) is enclosed. Further, the fact that Company has not sold these investments till date also proves that such investment which is long term and strategic in nature, is made for business purpose. .Thus, it is submitted that overseas investments made are for the furtherance of assessee‟s business only and therefore, would squarely be counted as for the purpose of business. It is submitted that various Courts have laid down that investment in subsidiary / group company should be considered as part of commercial expedience and therefore, interest should be allowed. In this connection, attention is invited to judicial precedent in case of EIH Associated Hotels vs, DCIT (ITA no. 1503/Mds/ 2002)(Che) (PB pages 1006 to 1011) on the aspect of investments in subsidiary are for the purpose of business. The Tribunal in this case observed that “» This fact supports the case of the assessee that the assessee is not into the

ITA No.950/Mum/2021 A.Y. 2014-15 business of investment and the investments made by the assessee are on account of business expediency‟. Reliance is further placed upon other decisions on this aspect : - S.A, Builders Ltd. (158 Taxman 74) (SC) - In this case, interest on cash credit which was given as interest free funds to subsidiary was allowed observing that where holding company, has a deep interest in its subsidiary, and the holding interest in investing in overseas companies, one any advances borrowed money to a subsidiary which is used by the diary for some business purposes, the holding company would be entitled to deduction of interest on its borrowed loans as a ordinarily expenditure, if it was incurred on grounds of commercial expediency. The above decision has been relied upon by Hon'ble Chennai Tribunal in case of Toll (india) Logistics (P) Limited (ITA No. 677/Mds/2012) wherein it observed that “the loans had been advanced as a measure of commercial expediency and that the funds were used by the subsidiary for the purpose of business only.” Reliance Communications Infrastructure Ltd (207 Taxmann 219) (Bom) - In this case, advances given to subsidiary in consideration to execute counter guarantees on behalf of the assessee was held to be out of commercial expediency for furthering the business of the assessee shall not attract disallowance of interest. SP. Jaiswal Estates (P.) Ltd (147 TT] 649) (Kol) - In this case, the assessee advanced secured loans as interest free funds to subsidiary, which was used by it for purpose of business i.e. hospitality business / construction of hotels. The interest on secured loan was denied by AO. The Tribunal, while relying on S. A. Builders Ltd (supra), held that once commercial expediency is established, interest on borrowed funds is to be allowed. It observed that when an assessee gives an interest

ITA No.950/Mum/2021 A.Y. 2014-15 free advance to a wholly owned subsidiary for its business purposes, it cannot but ordinarily be said to be commercially expedient. Sitsons India (P.) Ltd. (63 SOT 37 )(Mum - Trib.) — In this case, the assessee formed a SPV with a third party, in order to fulfill a contractual commitment. The assessee invested certain sum in the SPV and also supplied certain materials to it. It incurred interest expenses on loans taken from its directors. On the aspect of allowability of such interest, Tribunal observed that the assessee was having commercial interest and investment was made for business purpose. In view of this, it deleted disallowance of interest expense. In this connection, the assessee also submits that apart from having commercial of the intentions for making aforesaid investment is acquiring controlling interest. By virtue of acquiring controlling interest, assessee is benefitted in many ways viz. aligning business strategies, sharing of industry benefits etc, which in turn help assessee in effectively carrying on its business. In this regard, reliance can be placed on following judicial precedents wherein it has been laid down that interest in respect of borrowings utilized for making investment in company for acquiring controlling interest / strategic interest is an allowable expenditure: Phil Corporation Ltd. (202 Taxman 368)(Bom) CIT vs Anand Technology Resource Park (P.) Ltd (202 Taxman 654)(Kar) ATE Enterprise Ltd vs JCIT (102 ITD 110) (Mum) CIT v Rajeeva Lochan Kanoria (80 Taxman 572) (Cal) CIT Vs. Jardine Henderson Ltd. (70 Taxman 36

we would also like to bring to your notice that similar disallowances for AY 2009Ay 201 0-11, AY 2011-12 have been deleted by the DRP.

ITA No.950/Mum/2021 A.Y. 2014-15 However, as the revenue has 10 erred an appeal, the DRP has not given this relief for AY 2012-13. In view of above, it is submitted that acquiring controlling interest in group by investing in overseas companies / JVs is nothing but for the purpose of business. Without prejudice to the aforesaid submission that disallowance of interest in respect of investments made in overseas subsidiaries / JVs should is allowable under Section 36(1)(iii), it is submitted that if interest is disallowed under the head “business income”, the same being wholly and exclusively for the purpose of making or earning income (eg dividend), it would be allowable under the head “income from other sources” u/s 57(iii) as dividend from these companies would be taxable under this head. It is further submitted that it is not necessary that income should have actually earned during the year under consideration to determine allowability of expenses. In this connection, reliance is placed on the Hon‟ble Supreme Court's decision in case of CIT vs Rajendra Prasad Moody (supra). In this case, the Hon‟ble Supreme Court held that to claim deduction u/s 57(iii), it is not even necessary that any income should in fact have been earned as a result of the expenditure. The Hon‟ble Apex Court allowed deduction of interest paid on money borrowed for investment in shares, which had not yielded any dividend u/s 57(iii). In view of above, it is submitted that interest is allowed u/s 36(1)(iii) on account of commercial expediency or without prejudice to it, same is also allowable u/s 57(iii). 4.4The submission of the assessee „is considered. However, the same is not found acceptable. The contention of the assessee that the dividend from above entities are taxable therefore either deduction should be allowed u/s 36 (1) (iii) or u/s 57 (iii). The declaration of dividend is

ITA No.950/Mum/2021 A.Y. 2014-15 depend upon the wish of the foreign entity if they want to declare dividend they may do so or if they do not want they may avoid the same, merely because dividend is taxable -deduction of interest cannot be allowed. If the assessee has to claim interest expenditure the funds must have been utilized for the purpose of business. Instead of making investment in JV‟s & subsidiaries the assessee could have made direct investment as a branch. In that case profit of branch is taxable in India and deduction can be claimed by the assessee. By making investment in subsidiaries and JV‟s the right to tax has foregone by India therefore deduction of interest u/s 36(1) (iii) cannot be allowed. 4.5 With regard to the claim of the assessee that the assessee will receive management fees from the above JV‟s and foreign subsidiaries which is taxable the same fs also found without any merit. The management fee can be received for providing management services not for investment in JV‟s and subsidiaries therefore this contention of the assessee is also rejected. 4.6 With regard to without prejudice submission of the assessee that the assessee is entitled to claim deduction u/s 57 (iii) following the ruling in Rajendra Prasad Modi case, the same is also without any merit. In the case of Rajendra Prasad Modi the dividend was receivable from Indian Company whereby any tax duty or cess etc. if any paid by the company which declares dividend is vested with Indian Govt. In the present case investment is made in foreign JV‟s and subsidiaries whereby Indian Govt. has not right to receive any tax therefore deduction is not allowable even u/s 57 (iii) of the I. T. Act, 1961. 4.7 Since, the assessee has not proved the entire investment in foreign JV‟s and subsidiaries have been made out of own funds, it is held that the Investment have been made out of consolidated fund available with the assessee, therefore, proportionate disallowance of interest need to

ITA No.950/Mum/2021 A.Y. 2014-15 be made u/s 36(1) (iii) of the L T. Act, 1961. Accordingly, the disallowance u/s 36 (1)(iii) is computed as under: Particulars Amount (Rs.) Interest Paid 98.82 crore Disallowance 45.47 crore 98.82 crore * 3113.08 crore/6766.37 crore Disallowance of Rs. 45,46,52,295 4.8 In view of above, an amount of Rs.45,46,52,295/is disallowed u/s 36(1)(iii) and added back to the income of the assessee. Penalty proceeding u/s 271(1) (c) of the LT. Act, 1961 is initiated for furnishing inaccurate particulars of income. 4.9 The assessee filed objection before the DRP against the draft order passed on 29.12.2017. The DRP-2(W2Z) in his direction passed u/s 144C (5) of the IT Act, 1961 dated 28.09.2018 sustained the additions proposed by placing reliance in assessee‟s own case for previous years. Hence, disallowance u/s 36(1)(iii) of the Act amounting to Rs.45,46,52,295/- is made and added to the total income of the assessee. Penalty proceeding u/s 271(1)(c) of the I. T. Act, 1961 is initiated for furnishing inaccurate particulars of income.”

ITA No.950/Mum/2021 A.Y. 2014-15 considered by AO. The PCIT has no power to invoke the revisional power u/s 263 of the Act on the issues which have been considered by same/higher officer of him in view of the decision in the case of Barclays Bank PLC vs. CIT(IT) in ITA. No.827/Mum/2021 for the A.Y. 2013-14 dated 03.01.2022. The relevant finding has been given in para no. 12 to 36 which is hereby as under: - “12. We have carefully gone through the submissions in the case laws and the records. 13. First, we note that in this case, the assessment order was passed after transfer pricing adjustment were made by the TPO. These have been detailed in the assessment order para „7‟ of the assessment order referred above. The TP adjustment made by TPO were in total Rs. 83,045,395/-. Assessee had made objection before the DRP and pursuant to DRP direction, the assessment was framed as per section 144C(13). 14. As against the above, Ld.CIT has noted that in this case TPO has not proposed any adjustment. This is contrary to the facts in this case, the above shows that Ld.CIT has exercised his jurisdiction u/s 263 without properly appreciating the assessment order passed. He also seems to be ignoring the fact that assessee has chosen to file objection before the DRP. When the assessment order has been passed pursuant to the direction of DRP, the appeal from the said assessment order does not lie with the ld.CIT(A), but lies directly to the ITAT as per provision of section 253(d). Now, the issue to be addressed in this case is whether, the Ld.CIT has erred in initiating proceedings u/s. 263 of the Act, when the original assessment order has been passed u/s. 143(3) r.w.s. 144C(13), on the basis of the directions of the Dispute Resolution Panel(DRP). 15. We may gainfully refer to the provision of section 263 in this regard.

ITA No.950/Mum/2021 A.Y. 2014-15 “263. (1) The Principal Commissioner or Commissioner may call for and examine the record of any proceeding under this Act, and if he considers that any order passed therein by the [Assessing] Officer is erroneous in so far as it is prejudicial to the interests of the revenue, he may, after giving the assessee an opportunity of being heard and after making or causing to be made such inquiry as he deems necessary, pass such order thereon as the circumstances of the case justify, including an order enhancing or modifying the assessment, or cancelling the assessment and directing a fresh assessment. Explanation 1.—For the removal of doubts, it is hereby declared that, for the purposes of this sub-section,— (a) an order passed [ on or before or after the 1st day of June, 1988] by the Assessing Officer shall include (i) an order of assessment made by the Assistant Commissioner [or Deputy Commissioner] or the Income tax officer on the basis of the directions issued by the [Joint] Commissioner under section 144A. (ii) an order made by the [Joint] Commissioner in exercise of the powers or in the performance of the functions of an Assessing officer conferred on, or assigned to, him under the orders or directions issued by the Board or by the [Principal ] Chief Commissioner or] Chief Commissioner or[Principal Director General or] Director General or[ Principal Commissioner or] Commissioner authorized by the Board in this behalf under section 120. (b) “record” [ shall include and shall be deemed always to have included] all records relating to any proceeding under this Act available at the time of examination by the [Principal [Chief Commissioner or Chief Commissioner or Principal] Commissioner or] Commissioner; (c) where any order referred to in this sub-section and passed by the Assessing Officer had been the subject matter of any appeal [filed on

ITA No.950/Mum/2021 A.Y. 2014-15 or before or after the 1st day of June, 1988], the powers of the [Principal Commissioner or] Commissioner under this sub-section shall extend [and shall be deemed always to have extended to such matters as had not been considered and decided in such appeal.]” 16. A reading of the above shows that the Principal Chief Commissioner or Chief commissioner may revise order passed by the AO, if the same is erroneous in so far as prejudicial to the interest of the revenue. The Explanation 1(a) of the Act referred above explains the order passed by the AO which can be subject matter of section 263 revision. The above explanation explains/clarifies that order of the AO in certain cases passed on the direction of certain superior officers can also be subject matter of section 263. The above explanation does not include the order passed under the direction of DRP u/s. 144C(13) of the Act. The legislature in its wisdom has thought it appropriate to include orders passed by the AO under direction u/s. 144A, but not under direction u/s. 144C(13). This is also in accordance with the provisions of the Act contained in section 144C, which we shall detailed at a later stage. The Ld.CIT in this case seems to be quiet conscious of this fact as he has mentioned on one of the issues, that AO has not properly followed the direction u/s. 144A. But, he is quiet silent and has nowhere mentioned that the final assessment order is passed after the direction of DRP. Admittedly, this is not a case, where draft assessment order is being revised. This is a case where final assessment order passed pursuant to the direction of DRP u/s. 144(3) is being revised by Ld.CIT. Ld. Counsel of the assessee in this regard submits that from the Finance Act, 2009, memorandum explaining the rationale behind the insertion of section 144C of the Act by the Finance Bill, 2009 as also the CBDT Circular No. 5 of 2010 dated 3 June 2010 issued explaining the said insertion, the notes on clauses, etc., it can be seen that consequential amendments have been made to

ITA No.950/Mum/2021 A.Y. 2014-15 various provisions of the Act as a result of insertion of section 144C in the Act. Such consequential amendments have been made to section 13 1, section 246A and section 253 of the Act. That however, no amendment is made in section 263 of the Act as a consequence of insertion of section 144C of the Act to deem such orders being capable of being revised. That therefore, the memorandum, circular, etc. support the Assessee's stand that once the Assessing Officer passes an order in accordance with the Directions issued by a superior authority (being DRP) the same cannot be revised by the CIT under section 263 of the Act. The above submission has sufficient cogency as our following discussion will further oxygenate the same. 17. It will also be gainful to refer to the provision of section 144C dealing with the reference to DRP (1) The Assessing Officer shall, notwithstanding anything to the contrary contained in this Act, in the first instance, forward a draft of the proposed order of assessment (hereafter in this section referred to as the draft order) to the eligible assessee if he proposes to make, on or after the 1st day of October, 2009, any variation in the income or loss returned which is prejudicial to the interest of such assessee. (2) On receipt of the draft order, the eligible assessee shall, within thirty days of the receipt by him of the draft order,— (a) file his acceptance of the variations to the Assessing Officer; or (b) file his objections, if any, to such variation with,— (i) the Dispute Resolution Panel; and (ii) the Assessing Officer. (3) The Assessing Officer shall complete the assessment on the basis of the draft order, if— (a) the assessee intimates to the Assessing Officer the acceptance of the variation; or

ITA No.950/Mum/2021 A.Y. 2014-15 (b) no objections are received within the period specified in sub- section (2). (4) The Assessing Officer shall, notwithstanding anything contained in section 153 [or section 153B], pass the assessment order under sub- section (3) within one month from the end of the month in which,— (a) the acceptance is received; or (b) the period of filing of objections under sub-section (2) expires. (5) The Dispute Resolution Panel shall, in a case where any objection is received under sub-section (2), issue such directions, as it thinks fit, for the guidance of the Assessing Officer to enable him to complete the assessment. (6) The Dispute Resolution Panel shall issue the directions referred to in sub-section (5), after considering the following, namely:— (a) draft order; (b) objections filed by the assessee; (c) evidence furnished by the assessee; (d) report, if any, of the Assessing Officer, Valuation Officer or Transfer Pricing Officer or any other authority; (e) records relating to the draft order; (f) evidence collected by, or caused to be collected by, it; and (g) result of any enquiry made by, or caused to be made by, it. (7) The Dispute Resolution Panel may, before issuing any directions referred to in sub-section (5),— (a) make such further enquiry, as it thinks fit; or (b) cause any further enquiry to be made by any income-tax authority and report the result of the same to it. (8) The Dispute Resolution Panel may confirm, reduce or enhance the variations proposed in the draft order so, however, that it shall not set

ITA No.950/Mum/2021 A.Y. 2014-15 aside any proposed variation or issue any direction under sub-section (5) for further enquiry and passing of the assessment order. [Explanation.— For the removal of doubts, it is hereby declared that the power of the Dispute Resolution Panel to enhance the variation shall include and shall be deemed always to have included the power to consider any matter arising out of the assessment proceedings relating to the draft order, notwithstanding that such matter was raised or not by the eligible assessee.] (9) If the members of the Dispute Resolution Panel differ in opinion on any point, the point shall be decided according to the opinion of the majority of the members. (10) Every direction issued by the Dispute Resolution Panel shall be binding on the Assessing Officer. (11) No direction under sub-section (5) shall be issued unless an opportunity of being heard is given to the assessee and the Assessing Officer on such directions which are prejudicial to the interest of the assessee or the interest of the revenue, respectively. (12) No direction under sub-section (5) shall be issued after nine months from the end of the month in which the draft order is forwarded to the eligible assessee. (13) Upon receipt of the directions issued under sub-section (5), the Assessing Officer shall, in conformity with the directions, complete, notwithstanding anything to the contrary contained in section 153 [or section 153B], the assessment without providing 29 any further opportunity of being heard to the assessee, within one month from the end of the month in which such direction is received. (14) The Board may make rules for the purposes of the efficient functioning of the Dispute Resolution Panel and expeditious disposal of the objections filed under subsection (2) by the eligible assessee. (14A) The provisions of this section shall not apply to any assessment

ITA No.950/Mum/2021 A.Y. 2014-15 or reassessment order passed by the Assessing Officer with the prior approval of the Commissioner as provided in sub-section (12) of section 144BA. (14b) The central Government may make a scheme, by notification in the Official Gazette, for the purposes of issuance of directions by the dispute resolution panel, so as to impart greater efficiency, transparency and account ability by- (a) eliminating the interface between the dispute resolution panel and the eligible assessee or any other person to the extent technologically feasible; (b) optimizing utilization of the resources through economies of scale and functional specialization; (c) introducing a mechanism with dynamic jurisdiction for issuance of directions by dispute resolution panel (14C) The Central Government may, for the purpose of giving effect to the scheme made under sub- section(14B), by notification in the Official Gazette direct that any of the provisions of this act shall not apply or shall apply with such exceptions, modifications and adaptations as may be specified in the notifications. Provided that no direction shall be issued after the 31st day of March, 2022 (14D) Every notification issued under sub- section(14B) and sub-section (14C) shall, as soon as may be after the notification issued, be laid before each House of parliament] (15) For the purposes of this section,— (a) "Dispute Resolution Panel" means a collegium comprising of three Commissioners of Income-tax constituted by the Board for this purpose; (b) "eligible assessee" means,— (i) any person in whose case the variation referred to in sub-section (1) arises as a consequence of the order of the Transfer Pricing Officer passed under sub-section (3) of section 92CA; and (ii) any non-resident not being a company, or any foreign company.]

ITA No.950/Mum/2021 A.Y. 2014-15 18. A reading of the said section brings to the fore following:- The assessee has option to go to the DRP by filing objection before it. As per the provisions of section 144C(5) of the Act, the Dispute Resolution Panel (DRP) shall in a case where any objection is received under sub-section (2), issue such directions, as it thinks fit, for the guidance of the Assessing Officer to enable him to complete the assessment. Further, the provisions of sub-section (7) of section 144C empowers the DRP to make any further enquiry or cause any further enquiry to be made by the Income-tax authority as it thinks fit. Explanation to sub-section (8) of section 144C duly provides that DRP has power to enhance the variation and the power includes to consider any matter arising out of the assessment proceedings relating to the draft order, notwithstanding that such matter was raised or not by the eligible assessee. Section 144C(13) provides that upon receipt of the directions issued by DRP, the Assessing Officer shall, in conformity with the directions, complete the assessment without providing any further opportunity of being heard to the Appellant. As noted above, it is now nobody‟s case that the Assessing Officer has not followed the direction of the DRP and completed the assessment not in conformity with the direction of the DRP. Therefore, the final Assessment order cannot be said to be erroneous. In fact, if the Assessing Officer had made any addition in the final assessment order which were not as per the direction of the DRP, the said assessment order would be held to be invalid and contrary to law. After the direction of the DRP, if the Assessing Officer would have made any addition or even any enquiry on the issues raised by the PCIT, the same would be contrary to law as being contrary to section 144C(13) of the Act. Therefore, there is no question of the PCIT holding that the final assessment Order is erroneous so as to come within the ambit of 263. Hence the final assessment order can only be erroneous only when the Assessing

ITA No.950/Mum/2021 A.Y. 2014-15 Officer has not followed the mandate of section 144C(13) of the Act. "Further, it is a settled legal principle that one cannot do indirectly what one cannot do directly [" Quando aliquidprohibetur ex directo, prohibetur etper obiiquum] If the AO could not have directly made any change in the final assessment order after the direction of the DRP, then the PCIT also cannot indirectly make any change so as to circumvent the provision of section 144C(13) of the Act. Reliance in this regard is placed on the decision of the Apex Court in the case of Supertech Limited v Emerald Court Owner Resident Welfare Association and Ors. (MANU/SC/08643/2021). 19. Further, the scheme of the Act itself does not provide any interference in the direction of the DRP as the law containing section 144C(13) directs that the AO shall pass an order inconformity with the directions of the DRP without providing any further opportunity of being heard to the assessee. When the Act itself provide, that order has to be passed by the AO without providing any opportunity to the assessee pursuant to the direction of the DRP, the direction given in this order u/s. 263 by the Ld.CIT to the AO to call for the details of allowability of various deductions claimed by the assessee, in light of the observations discussed by him is quiet contrary to the sanguine provisions of law. Even otherwise, the order passed by the Ld.CIT is an exercise in futility inasmuch as, if the AO proceeds to pass an order by giving the assessee an opportunity of being heard, the same will be against the mandate of section 144C(13). Furthermore, it is also settled law that in assessment u/s. 144C, AO has to invariably pass a draft assessment order and give the same to the assessee for filing objection before DRP. Hence, the direction by the Ld.CIT to the AO to pass an order by-passing the provisions of passing the draft assessment order is also not sustainable in law.

ITA No.950/Mum/2021 A.Y. 2014-15 20. Now, we examine the constitution of DRP. As evident from the above, the DRP constitutes a collegium comprising of three Principal Commissioners or Commissioners of Income-tax, the directions given by them is binding upon by the AO. Hon‟ble Bombay High Court in the case of Vodafone India Services Pvt.Ltd. vs Union of India & Others 2013 SCC online Bom 1534 has expounded upon the proceedings at DRP as under:- “The proceeding before the DRP is not an appeal proceeding but a correcting mechanism in the nature of a second look at the proposed assessment order by high functionaries of the revenue keeping in mind the interest of the assessee. It is a continuation of the Assessment proceedings till such time a final order of assessment which is appelable is passed by the Assessing Officer. This also finds support from Section 144C(6) which enables the DRP to collect evidence or cause any enquiry to be made before giving directions to the Assessing Officer under Section 144C(5). The DRP procedure can only be initiated by an assessee objecting to the draft assessment order. This would enable correction in the proposed order (draft assessment order) before a final assessment order is passed. Therefore, we are of the view that in the present facts this issue could be agitated before and rectified by the DRP." [underline ours] 21. The above exposition duly elaborates upon the provisions of the Act contained under section 144C. 22. From the above, it is also apparent that members of the DRP are three in numbers and are individually equivalent in rank to the CIT, who is initiating proceedings u/s. 263 against the order passed by the AO pursuant to their direction. Now as far as equivalence of single CIT to a „colliguem of 3 CIT is concerned, it is settled law that bench comprising single persons is not higher/superior than a collegiums of

ITA No.950/Mum/2021 A.Y. 2014-15 three persons. Hence, it is abundantly clear that the DRP stands at a higher pedestal than the CIT passing an order alone. 23. Furthermore, we may refer to the decision of Hon‟ble Bombay High court in the case of Virendra Kumar Jhamb vs. N.K.Vohra (supra). In this case, the Jurisdictional High Court held that the assessee had approached the DDIT (investigation) under the Direct tax Amnesty Scheme. The CIT had accepted that the taxable income be computed at 8 percent of the total receipts. A second CIT, on scrutiny and verification of the assesses records, found the decision of the earlier CIT to be fair and justifiable. A subsequent CIT, sought to revise the order under section 263, and tax income at 9 percent of the receipts. The Bombay High Court inter alia held that the assessment orders were solely based on the directives of the earlier CITs, and the same could not be revised by the subsequent CIT under section 263. 24. In light of the above discussion and case laws, the case laws referred by the Ld.CIT-DR are not applicable on the facts of the case. As, we have already noted that the submission of Ld.CIT-DR are at variance with the exposition by Hon‟ble Bombay High Court in Vodafone India Services Pvt.Ltd.(supra). The Ld.CIT-DR in his submission has emphasized that proceeding before DRP is akin to appeal before Ld.CIT(A). This is quiet contrary to the Hon‟ble Bombay High Court exposition noted above and the other decisions of Hon‟ble Jurisdictional High court referred above. 25. The case of Devas Multimedia Pvt.Ltd.(supra) by the Hon‟ble Karnataka High Court was in connection with the writ petition filed by the assessee, where assessee has objected to the notice issued u/s. 263 of the Act. Furthermore, Hon‟ble High Court has expounded that writ court cannot examine the validity of notice on merits. Furthermore, the said decision has distinguished following decision of Hon‟ble Bombay High Court, i) Vodafone Services Pvt.Ld.(supra) wherein Hon‟ble

ITA No.950/Mum/2021 A.Y. 2014-15 Bombay Court has expounded that proceedings before the DRP is not an appeal proceedings, but correction mechanism in the nature of a second look at the proposed assessment order by high functionaries of revenue (ii)Vodafone India Services Pvt.Ltd. vs. Union of India (2014) 368 ITR 1(Bom.). In the present case, this Tribunal is under the jurisdiction of Hon‟ble Bombay High Court. Hence, we do not have any authority whatsoever to deviate from the exposition of the Hon‟ble jurisdictional High Court that the proceedings at DRP is not an appeal proceedings, but a correcting mechanism. Furthermore, the ratio from the Hon‟ble Bombay High Court in the case of Virendra Kumar Jamb(supra) also support this view. Hence, the submission of Ld. DR that subject under discussion here has not been subject matter of Hon‟ble jurisdictional High Court elaboration is not acceptable. Once, this is accepted, that the assessment order having been corrected by colligeum of three commissioner of income tax, the same can by no stretch of imagination be subject to revision by commissioner of income tax sitting alone. More so, in light of provision of section 144C(13) which clearly mandates that AO has to pass an order in accordance with the direction of the DRP without giving any opportunity to the assessee to so in the present case. If this order passed by the Ld.CIT is upheld and AO starts giving opportunity of hearing to the AO in accordance with the direction of the CIT, the same will be in violation of the sanguine provision of section 144C(13). 26. Hence, in light of the aforesaid discussions and precedents from Hon‟ble jurisdictional High Court, we set aside the orders of Ld.CIT and hold that he cannot legally assume jurisdiction u/s. 263 of the act on an order passed by the AO pursuant to the direction of DRP. This is over and above our other observations in para „14‟ of this order, where we have noted that Ld.CIT has passed this order without

ITA No.950/Mum/2021 A.Y. 2014-15 properly appreciating the assessment order. Since, we have quashed assessment order on jurisdiction itself, we are not dealing with the merits of the case.” 6. Accordingly, it is quite clear that the PCIT is not entitled to invoke the revisional power u/s 263 of the Act regarding the issue mentioned above. So far as the other issue regarding expenses of Rs.8.90 crores is concerned, we find that the AO issued the notice u/s 142(1) of the Act dated 02.10.2017 in which the relevant enquiry has been raised. The assessee also replied to the notice dated 16.10.2017 lies at page no. 148 of the paper book in which the relevant query was explained, however, for ready reference the para no. 4 is reproduced as under: - “4. Expenditure on a discontinued project at Lake End, Udaipur is charged off for commercial reasons-Rs.8.90 crores The assessee contends that expenditure of Rs.8.90 crores, incurred in relation to prospective hotel project, aborted and written off during the year being in the nature of extension/expansion of existing business is of revenue in nature. The assessee has relied on various rulings in this regards. Some of them are: (i) Priya Village Road shows Ltd. (185 Taxman 44) (Del HC) (ii) Modi Industrial (200 ITR 341) (Del HC) (iii) CIT Vs. Woodcraft Products Ltd. (1993) 217 ITR 862 (Cal HC) (iv) Assam Asbestos Ltd. (132 Taxman 808) (HC) (v) CIT Vs. Tata Robins Fraser Ltd. (2012) 253 CTR 227 (Jharkhand HC) (vi) Reliance Footprint Ltd. Vs. ACIT (2014) 29 ITR 82 (Mum-Trib) (vii) Dotex International Limited Vs. ACIT (2008) ITA. No.3214/Mum/2008 (Mum-Trib) (viii) Enpro India Ltd. Vs. DCIT (2000) 113 Taxman 132 (Del-Trib) (ix) Gujarat Green Revolution Co. Ltd. V ACIT (2013) 26 ITR 567 (x) Franco Indian Pharmaceuticals P. Ltd. 3 ITR 754 (mum)

ITA No.950/Mum/2021 A.Y. 2014-15 (xi) Kesoram Industries and Cotton Mills Ltd. (196 ITR 845) 7. Subsequently, after the reply of the assessee, the AO passed the order u/s 143(3) r.w.s. 144C(13) of the Act. In the said order, one possible view has already been taken. Examining the issue again and again nowhere seems justifiable. When a possible view has been taken by AO then the assessment is not liable to be reopened again on the basis of the second view if any taken by Ld. PCIT. In this regard, we also find support of the decision in the case of Malabar Industrial Co. Ltd. (243 ITR 83), CIT Vs. Nirav Modi (390 ITR 292), Aditya Builders (2017) 79 taxmann.com 394, CIT Vs. Tata Teleservices (Mah) Ltd. (2014) 47 taxmann.com 238, CIT Vs. Fine Jewellery (India) Ltd. (2015) 55 taxmann.com 514 & MOIL Ltd. vs. CIT (2017) 81 taxmann.com 420. Therefore, taking into account of all the above mentioned facts and circumstances, we are of the view that the order u/s 263 of the Act is wrong against law and facts, therefore, the same is hereby ordered to be set aside. 8. In the result, the appeal of the assessee is hereby allowed. Order pronounced in the open court on this 12/04/2022 Sd/- Sd/ (S. RIFAUR RAHMAN) (AMARJIT SINGH) ACCOUNTANT MEMBER JUDICIAL MEMBER Mumbai; Dated 12/04/2022 Vijay Pal Singh, (Sr. PS)

ITA No.950/Mum/2021 A.Y. 2014-15 आदेश की प्रनिनलनि अग्रेनर्ि/Copy of the Order forwarded to : 1. अपीलाथी / The Appellant 2. प्रत्यथी / The Respondent. 3. आयकर आयुक्त(अपील) / The CIT(A)- आयकर आयुक्त / CIT 4. 5. ववभागीय प्रवतवनवि, आयकर अपीलीय अविकरण, मुंबई / DR, ITAT, Mumbai 6. गार्ड फाईल / Guard file. आदेशधनुसधर/ BY ORDER, सत्यावपत प्रवत //True Copy// उि/सहधयक िंजीकधर /(Dy./Asstt. Registrar) आयकर अिीलीय अनधकरण, मुंबई / ITAT, Mumbai